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Steady performance; reaches net-debt free status…

About the stock: Dalmia Bharat Sugar (DBS) is only sugar company present in UP as well as in Maharashtra. The company has sugar crushing capacity of 35500 TCD (6 lakh tonnes pa), distillery capacity of 300 KLD (8.5 crore litre pa), co-generation capacity of 102 MW & wind power of 16.5 MW (total 30 crore units saleable power).

* The company is expanding its sugarcane & molasses and grain based annual distillery capacity from current 8.5 crore litre to 21 crore litre, which would be completed in a phased manner by December 2022

Q2FY22 Results: DBS reported steady numbers on high base of sugar exports.

* Sales were flat (1.2% growth) YoY, with lower sugar volumes, high ethanol volumes & improvement in sugar realisation

* EBITDA was at | 87 crore, down 5% YoY, with margins at 11.9%

* PAT was at | 59.2 crore (up 6.6% YoY) backed by reduced interest expense

What should investors do? DBS’ share price has gone up 3.5x in the last five years (from | 112 in October 2016 to | 394 in October 2021)

* We expect 2.5x increase in distillery volumes to boost earnings with CAGR of 16.1% during FY21-24E

* We maintain our BUY rating on the stock

Target Price and Valuation: We value the stock at | 610, ascribing a multiple of 14x FY23 earnings

Key triggers for future price performance:

* DBS is fastest in utilising B-heavy, sugarcane juice & grain route to produce ethanol. Distillery volumes to grow 2.5x to 21 crore litre by FY24

* The company been aggressive in exporting sugar & utilising higher global white sugar prices. Freight cost is much lower given its proximity to ports

* With the increasing profitability & reduction in sugar inventories, DBS would be generating cumulative free cash flow of | 626 crore in the next three years despite ~| 700 crore capex

Alternate Stock Idea: We also like Balrampur Chini in our sugar coverage universe

* The company is second largest and one of the most efficient sugar companies in India. Along with sugarcane juice, B-heavy, the company is also utilising grain based ethanol to leverage the ethanol opportunity in India

* We value the stock at | 515/share with a BUY recommendation

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